Real Estate Legal Update – Summer 2023

A welcome from the editor…

Welcome to the latest edition of the Real Estate Legal Update.

This quarter, we look at the first decision on Remediation Contribution Orders under the Building Safety Act 2022, we have more cases on ownerless property and on the discharge of restrictive covenants.

Landlord and Tenant round up:

We look at whether a tenant can serve a break notice too early, what counts as a material breach when it comes to forfeiting a lease and whether limitations on rights reserved to landlords are in fact contractual obligations.

Planning Points:

We look at how to challenge (or not) the imposition of Community Infrastructure Levy.

Tax Tips:

We cover the meaning of ‘non-residential’ when it comes to Stamp Duty Land Tax. 

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CASE LAW UPDATE 

Development – Remediation Contribution Orders: 9 Sutton Court Road, Sutton (Batish v Inspired Sutton Ltd)

Key points:

• The Building Safety Act 2022 (BSA) was introduced following the tragic events at Grenfell Tower, to implement the recommendations and principles set out in the Hackitt Review
• The BSA fundamentally reformed the regimes regulating, and standards relating to, building and fire safety
• It contains extensive provisions affecting the landlord and tenant relationship, imposing duties and liabilities in relation to matters of building safety
• Remediation Contribution Orders (RCO) are orders requiring a specified entity (including landlords and developers) to make payments towards the cost of remediating certain (‘relevant’) defects in connection with the construction or conversion of a building
• Residential tenants have statutory protection against excessive service charges and landlords must follow a notice procedure and consult with tenants before carrying out works above a specified value, otherwise they can only recover a limited contribution from the tenants

ISL was a company set up to develop a high-rise apartment block at 9 Sutton Court Road in London. It was originally intended, as is usual for such companies, that ISL would sell the freehold after the development was completed, but in fact, the freehold was never sold.

In 2020, certain defects in the building were identified; unsafe ACM (aluminium composite material) and HPL (high pressure laminate) cladding needed to be replaced and work was also needed to balconies, which were deemed to be unsafe or a fire safety hazard.ISL served notices on the tenants of the building and, after the remediation works had been started, issued invoices to the tenants, which were paid. Subsequently, B (on behalf of 18 tenants) applied for an RCO under the BSA, on the basis that the tenants had made service charge payments for the remediation of ‘relevant defects’, which they were entitled to have reimbursed.ISL didn’t contest the application, and the First Tier Tribunal agreed with the tenants, finding that the various tests in the BSA had been met and ordering ISL to pay £194,680 to the tenants.

Practical implications:

The BSA is an extensive and complex piece of legislation, which developers, building owners and occupiers and lenders are all trying to get to grips with. This is the first case involving an application for an RCO and although there was no hearing, it gives a sense of how the Tribunal might deal with future applications.

In general terms, the BSA enables the Tribunal to make an RCO provided a number of criteria are met; the application must be made by an ‘interested person’ in relation to a ‘relevant building’ and ‘relevant defects’. The Tribunal must consider it ‘just and equitable’ to make the order, and they can only be made against corporate entities and partnerships. In this case, the Tribunal decided it was ‘just and equitable’ to make the order on the basis that the tenants had paid for the cost of works which ought to have been covered by ISL.

For advice on this emerging area of law, contact Richard Adams.

Dissolution – vesting order: Dixon v The Crown Estate Commissioners

Key points:

• It is a principle of land law that no land can ever be truly ownerless, so, as a hangover from the feudal system of land tenure, all land in England and Wales is ultimately owned by the Crown
• Less regal entities (human and corporate) can hold a freehold or a leasehold estate in land
• We are all familiar with the concept of a lease – and the leasehold estate – coming to an end, but a freehold estate can also come to an end if it doesn’t have an owner, for example if the Crown disclaims freehold land that belonged to a now-dissolved UK company, at which point, the land reverts (‘escheats’) to the Crown Estate
• The Court has a discretionary power under the Law of Property Act 1925 and under the Trustee Act 1925 to make a vesting order, vesting the title to escheated property in an applicant if it can establish its entitlement to the land

D, and his cousin, also D (let’s call them collectively ‘D’) had been the two shareholders in a building and property development company, DPHL. DPHL also owned two residential properties, which were let to tenants. DPHL was very profitable and had no debts but, for personal reasons, the cousins came to an amicable agreement to have DPHL wound up and the (sizeable) assets distributed to them. This distribution included the transfer of the two houses, one to each of them.

D's accountant had confirmed that the transfers had taken place, and each paid tax on the distributions and, going forward, on the rental income they each received.

A couple of years later, believing DPHL to have no assets, the then directors (one of the Ds and his daughter) applied to have DPHL struck off the register of companies at Companies House. DPHL was officially dissolved on 15 June 2010.

It later came to light that DHPL had not in fact been wound up and neither of the two properties had been transferred to D. As they were still owned by DHPL at the time it was dissolved, the freeholds vested in the Crown, which then disclaimed the titles and they escheated to the Crown Estate.

D made applications to have the titles vested in them under both the Law of Property Act and the Trustee Act, arguing they had claims based on proprietary estoppel: DPHL, through its accountant, had made various representations which D had relied on to their detriment. The Court found that the proprietary estoppel gave rise to a sufficient interest by way of trust and made the vesting orders pursuant to s44(ii)(c); Trustee Act.

Practical implications:

As we saw in the Spring edition of this update, the Court has a very wide discretion under the Trustee Act and can exercise its power to grant a vesting order as it sees fit, having regard to all the circumstances of the case. The Court will look to do justice in all the circumstances, which will, of course, be different each time. However, it is important to be aware of the different regimes that apply when companies are dissolved and what happens to any property it owns either on trust or beneficially. In this case, the Court did also order revesting under the Law of Property Act in case there was any doubt over whether D did have an interest in the properties by virtue of proprietary estoppel. 

Restrictive covenants – blanket discharge: Sutton v Baines

Key points:

• The Lands Chamber of the Upper Tribunal has jurisdiction to discharge or modify restrictive covenants affecting the use and development of land or buildings on it, if certain statutory grounds are made out
• One of the most common grounds is that the covenants impede the reasonable use of the burdened land and in doing so, does not secure any practical benefit of substantial value or advantage to the person who benefits from the covenants

S owned 39 Muswell Road in Mackworth, Derby. The property had a large garden to the side and S wanted to build a second house on it. However, her property was subject to a restrictive covenant imposed in 1970 restricting its use to a single private dwellinghouse.

B lived at 5 Putney Close, the garden of which abuts the land on which S wanted to build.In November 2014, S obtained outline planning permission to build a two-storey house on the garden land, set further back than No. 39 but this permission lapsed. S then proposed an alternative development, with a house to be built in line with No. 39.S applied to have the restrictive covenant discharged (not modified) on the grounds that it impeded a reasonable use of the land and didn’t secure any practical benefit of substantial value or advantage. B objected on the basis that the new house would impact on their privacy and would make them feel ‘hemmed in’, and it would diminish the value of their property (expert evidence indicated this could easily be as much as 20-25% of the value, but could also be more depending on what was actually built).

The Tribunal found that S’s proposed development was a reasonable use of her land, and it was common ground that the covenant impeded this use. The Tribunal also felt that the covenant plainly secured practical benefits to B, so the last question to be determined was whether those practical benefits were of substantial value or advantage. This is where things got tricky – S had applied for a blanket discharge, which made it difficult to assess the impact on B’s property. S didn’t have a current planning permission and discharging the restriction would leave B liable to whatever planning permission S could obtain. This made it impossible for the Tribunal to assess the value of any compensation that might be due to B. S had failed to jump the substantiality hurdle and her application was refused.

Practical implications:

Most of the cases we report in this Bulletin cover applications to modify covenants; it is less usual to see an application for a straight-up discharge. Perhaps if S’s application had been for modification, she might have been successful. Applicants looking for a covenant to be discharged should come to the Tribunal armed with robust valuation evidence and clear development proposals so the impact can be quantified. 

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LANDLORD & TENANT ROUND UP

Break notice – too early?: Vistra Trust Corp (UK) Ltd v CDS (Superstores International) Ltd

Key points:

• If a tenant has the protection of the Part II; Landlord & Tenant Act 1954, it is entitled to request a new lease at the end of the contractual term
• If a ‘notice to quit’ as already been served by the tenant, it cannot make such a request

In February 2008, B&Q took a lease of a retail superstore in Widnes. The lease was for a term of 21 years expiring in February 2029. The lease contained a tenant’s break right, so the tenant could terminate the lease on or after 11 February 2023 by giving not less than six calendar months’ notice in writing. So far, so not unusual.

On 10 December 2018 (so just over four years from the break date), B&Q’s solicitors sent its landlord (VTCL) a break notice to terminate the lease on 11 February 2023 (the break date).In November 2020, B&Q assigned the lease to CDS, with the consent of VTCL. CDS was aware that the break notice had been served and the intention was for VCTL to grant a new 15-year lease to CDS to start on 12 February 2023 (the day after the break date). However, it became clear to CDS just a few days before the assignment completed that VTCL would not be granting a new lease to CDS and was, in fact, in negotiations to grant a lease to a third party.

In June 2022, CDS served a notice under section 26 of the Landlord & Tenant Act 1954 claiming a new lease for a term of 15 years starting on 12 February 2023. VTCL argued the section 26 notice was invalid and that CDS wasn’t entitled to a new lease: the lease would terminate on the break date and CDS would have to move out of the premises. It brought proceedings seeking declarations from the Court to this effect.CDS contested the claim and sought its own declaration that the lease would not end on the break date and that it was entitled to remain in occupation of the premises. It set out several technical points which, in its view, called the validity of the break notice into question. The one we’re focussing on is CDS’s argument that the break notice had been served prematurely. CDS tried to argue that a break notice should be given ‘a reasonable time’ before the break date, but there was nothing in the lease to indicate a maximum period of notice – just the minimum period of six months. The Court found this to be very clear and did not see the need to ‘imply any term that the notice is to be given only a reasonable time before a date six months before 11 February 2023’. VCTL succeeded and was awarded summary judgment.

Practical implications:

It’s not often we see the tenant trying to argue that a break notice was invalid, but the Court felt CDS had no real prospect of success in this case. The wording in the break clause was similar to that in most other well-drafted leases, with a clearly stated minimum notice period. It is rare to see a maximum period – or a ‘window’ within which a break notice can be served – and this decision seems unlikely to change current practice.

The case is perhaps more than anything, a warning to those looking to take assignments of leases where the outgoing tenant has already served a break notice, to make sure that the landlord is tied into any new arrangement with the assignee and is not in a position to turf them out on the break date.

Terminating a lease under a contractual break right isn’t always as easy as it ought to be, as evidenced by the growing body of case law on the validity of break notices and compliance with break conditions. For further advice, speak to a member of our Property Litigation Team.

Forfeiture – access: Cumbria Zoo Company Ltd v Zoo Company Investment Ltd

Key points:

• Forfeiture is a way for a landlord to bring a lease to an end in certain circumstances related to tenant default (or insolvency)
• A tenant can apply to the Court for relief from forfeiture if there is a breach and the tenant remedies it
• A tenant can also apply for a declaration that the forfeiture was invalid

There is a complex (and emotive) back story to the proceedings between these two parties, but in essence CZCL had a lease of zoo premises near Ulverston in the Lake District. The lease contained a fairly standard right for the landlord to enter the premises for any purpose mentioned in the lease or connected with the landlord’s interest in the property and required the tenant to permit access at any reasonable time and on reasonable notice. There were a series of other management/services agreements inherited by the current parties, covering the use of various assets by the zoo operator (including some animals – one agreement related to the loan of a Humboldt penguin and a Chilean flamingo).

ZICL became the landlord of the zoo in early 2021 and, not long after, alleged the zoo wasn’t being properly run and that CZCL had dishonestly appropriated and sold off certain items including furniture, an excavator and a steam locomotive (but not the penguin or the flamingo).

ZICL wrote to CZCL saying a representative would come to the zoo on 29 April 2021 to retrieve a list of items allegedly belonging to ZICL. CZCL refused access on the basis that the request for access was made solely for the purposes of recovering personal property, which was not covered by the lease and did not relate to the landlord’s interest in the property. ZICL claimed this was a wrongful refusal of access by CZCL in breach of the lease.ZICL then sought to arrange for an inspection to be carried out by its representative (R). The parties agreed on a time of 2pm on 6 May. R turned up at the zoo at 9am, alleging CZCL had put details of the visit on social media with a view to ‘encourage…supporters to visit the Property at this time to disrupt [R’s] visit’ and stating he had been advised by the police (who also turned up with him at 9am) to bring the visit forward to avoid any issues. CZCL refused entry at 9am and by the time their own representative arrived (an hour and a half later, so still earlier than the agreed time of 2pm), R had left. ZICL alleged this was the second wrongful refusal of access by CZCL.ZICL sought to forfeit the lease for breach, and these proceedings were brought by CZCL for a declaration that the forfeiture was invalid.

The High Court found that there had been no material breach of the lease terms by CZCL in refusing access to ZICL. The first attempt by ZICL to exercise its rights had not been in connection with its interest in the property, merely to recover chattels, and the second visit had not been requested on reasonable notice, given the shenanigans on the morning of 6 May.

Practical implications:

Landlords are not entitled to access a property for any reason, and it is important to check – and comply with – any provisos subject to which rights are granted or reserved (just ask the landlord in the next case in this bulletin!), particularly if seeking to allege a breach has occurred. Whether you are on the giving or receiving end of a statutory notice to forfeit a lease, speak to a member of our Property Litigation Team.

Reserved rights – contractual obligations: Dunward Properties Ltd v Isaac

Key points:

• Leases of part usually reserve rights to landlords to allow them to carry out works to the building of which the demised premises form part
• These rights will be caveated to provide some protection to tenants
• Leases also contain – albeit limited – express covenants by landlords to allow ‘quiet enjoyment’ of the premises
• The High Court has recently interpreted such a caveat in a surprising way

This case involves a lease of a first floor flat in a building in Balham, South London, purchased by Mr I in August 2015 for £574,950. The building was owned by DPL. It contained another flat on the second floor and the ground floor was used for commercial purposes – at the time Mr I bought the flat, the ground floor was used as an estate agency.

Mr I’s lease reserved rights to the landlord to carry out works to the structure of the building so as ‘to carry out any development of whatever nature upon the Building’. This was subject to a proviso that any such works did not diminish the value of Mr I’s flat.

In 2016, the estate agency moved out of the ground floor and, the following year, a prospective new tenant applied for planning permission to change the use of the ground floor to a bar/restaurant. Planning permission was granted and, during the summer of 2017, the new tenant carried out the works to convert the office space into the “Brick and Liquor” bar.

Mr I was not happy because of the noise and the fumes from the bar. He ended up selling his flat in May 2020 for £470,000 and then brought a claim against DPL on various grounds, including breach of contract, as well as nuisance, breach of quiet enjoyment and derogation from grant. He claimed damages for the reduction in the value of the flat – he claimed that, if the ground floor had continued to be used as an estate agency or similar, he would have been able to get £575,000 for it.

In the County Court, Mr I was successful in relation to his claim for breach of contract, but not the other heads of claim. The judge found DPL was in breach of the terms of the lease and awarded £105,000 in damages. DPL appealed to the High Court.DPL argued that the proviso to its right to carry out works to the building simply limited what DPL could do (and, therefore, the remedies Mr I was entitled to), rather than being a contractual obligation not to carry out works that diminished the value of the flat. DPL also sought to argue that it wasn’t the works as such that were the issue, it was the change of use from office to bar.

The High Court was having none of this. It found that the proviso operated as a contractual obligation on DPL and that it was a combination of the works and the change of use that led to the reduction in value of the flat. The Court dismissed DPL’s appeal.

Practical implications:

An interesting decision, and not one we’ve really seen much case law on. The claimant in this case hedged his bets in terms of the heads of claim, because different remedies are available for different types of breach and the Court was minded to take a holistic (if surprising) view when interpreting the lease.

The other point to note is that the works were not even carried out by the landlord here, but by the incoming tenant of the ground floor, albeit with the landlord’s knowledge and, presumably, consent. Although not explored in the judgment, the lease may have contained general wording that extended an obligation not to do something (in this case, diminish the value of the flat) to not allowing or permitting someone else to do it either.

Both landlords and tenants would do well to check not just the express covenants but also any provisos to rights granted or reserved to try and ensure compliance with lease terms. For advice on particular drafting or potential disputes, contact a member of our Property Litigation Team.

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PLANNING POINTS

Community Infrastructure Levy – judicial review: R (on the application of Braithwaite and Melton Meadows Properties Ltd) v East Suffolk Council

Key points:

• Community Infrastructure Levy (CIL) is a discretionary planning charge on development, payable by landowners or developers to local authorities to fund local and sub-regional infrastructure
• There is a rather involved process of serving various notices at different points between planning permission being granted and development being commenced
• A local planning authority (LPA) can grant planning permission subject to conditions
• Section 73 of the Town and Country Planning Act 1990 allows applications to be made for permission to develop without complying with such conditions or for variation of conditions
• Developers need to act quickly if they want to challenge a CIL liability notice

In 2017, ESC granted planning permission to B for an office and residential scheme at the site of a disused factory in Melton, Suffolk. The permission was subject to several conditions. ESC issued a liability notice for CIL shortly afterwards and B served an assumption of liability notice in the summer of 2018. The CIL liability was around £920,000.

In December 2018, a section 73 planning permission was granted, but as there was no change in the amount of CIL payable, no further liability notice was served. Then, in February 2019 a second section 73 permission was granted, which resulted in a reduced CIL liability of around £871,000.In March 2019, B transferred the site to MMPL. Work began on site in August 2019, but no commencement notice was served on ESC. In June 2020, ESC issued a liability notice in relation to the second section 73 permission, but served it on MMPL rather than on B (who still remained liable to pay the CIL). ESC issued a demand notice at the same time, and then sent a further demand in December 2020, which imposed a late payment surcharge.

On appeal, the Planning Inspector found that the 2020 liability notice had been served late and on the wrong person, so the second demand notice was quashed, along with the surcharge.

In September 2021, ESC issued a revised liability notice on both B and MMPL requiring immediate payment. B and MMPL applied for judicial review, on the basis that the 2020 liability notice was invalid and, therefore, there was no base liability on which the ‘revised’ notice could sit.

The problem for B and MMPL was that they should have challenged the 2020 notice by judicial review within the required time limit of three months, which they did not do. The High Court refused B and MMPL’s application. The 2020 liability notice was to be treated as valid until it was overturned by a court, which it hadn’t been, so ESC had been entitled to issue a revised liability notice at any time.

Practical implications:

The CIL regulations are complex  – in fact, the Government has just finished a consultation on a new infrastructure levy that will seek to reform the current system of CIL and section 106 planning obligations – and it’s important for both developers and local planning authorities to understand their requirements.

The Court of Appeal has made it clear in this case that a liability notice, even one with irregularities, will be valid unless and until it is overturned by a court and can only be challenged by way of an application for judicial review within the three-month time limit. It’s not enough for a developer to challenge demand notices or surcharges, even though this is the simpler, quicker and cheaper option.

For further advice, please contact a member of our Planning Team.

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TAX TIPS

SDLT – rights: Sexton v HMRC

Key points:

• Stamp Duty Land Tax on residential properties is complex and can be more costly than that payable in relation to purely commercial buildings, or properties which have an element of both residential and non-residential use
• Whilst being able to treat a purchase as non-residential can have significant tax benefits, there are specific criteria as to what amounts to ‘non-residential’ use

In 2018, S bought the long lease of a flat in London SW7, which included a right to use a communal garden. After a couple of years, tax advisors submitted an SDLT overpayment relief claim on behalf of S, claiming that the property was not purely residential. The basis of the claim was that the right to use the garden was in common with others, so use of the garden was not residential…

Unsurprisingly, HMRC found that the property was wholly residential and refused to refund the overpayment (the claim was for £85,250). S appealed, but the First Tier Tribunal was having none of it either. It applied two possible rulings, the first being that the flat and the garden easement together comprised residential property, the second being that the garden easement itself was a right that subsisted for the benefit of the flat, so was itself residential ‘property’.

Practical implications:

Commentators have raised eyebrows as to how this case even got to the Tribunal, but over the last year or so, there has been a spate of refund claims submitted on behalf of homeowners by rogue ‘tax repayment agents’. These agents track new owners down through Land Registry records and cold call them with promises of refunds of ‘overpaid’ SDLT, which often don’t succeed and which end up costing the owner even more money.

HMRC issued a press release highlighting the issue last year, along with some examples of spurious claims.

Given the complexities of this area of law, and the possible financial implications, speak to a member of our Tax Team for further advice.